By: Jonathan H. Freiberger As readers of this BLOG know, we frequently write about issues relating to mortgage foreclosure. We have also written numerous articles relating to the recently enacted FAPA. See, e.g., < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . Today’s BLOG article relates to U.S. Bank National Association v. Lynch , a case decided by the Appellate Division, Third Department, on October 24, 2024, and in which it determined that the retroactive application of FAPA does not violate a lender’s due process rights. In 2006, the defendant borrower in Lynch borrowed money from the lender and secured her repayment obligations with a mortgage on real property. The lender commenced a foreclosure action in 2008 after an alleged default by the borrower. The lender’s summary judgment motion was granted in 2011, but the case was “marked off” the calendar as inactive after the lender failed to file an order granting the motion. A second foreclosure was commenced by the lender in 2015. The Borrower defaulted in appearing. In 2017, a judgment of foreclosure and sale was issued in 2017. In 2019, before the lender took steps to enforce the judgment of foreclosure and sale, the borrower moved to vacate her default. The motion court granted the motion. Thereafter, the lender moved for summary judgment and the borrower cross-moved for summary judgment, arguing that the lender’s second action was time-barred. Finding that the lender accelerated the loan in 2008 when it commenced the first action and failed to subsequently de-accelerate, the motion court held that the second action was time-barred. In 2022, the lender moved to restore the first action to the calendar, which motion was granted over the borrower’s opposition. The motion court specifically rejected the borrower’s argument that FAPA mandated the dismissal of the first action as time-barred. The borrower appealed. The borrower argued to the Third Department that the motion court erred in failing to apply FAPA. Conversely, the lender argued that retroactive application of FAPA would violate its due process rights. Among other things, FAPA amended RPAPL 1301 to add subparagraph 4, which provides that “ f an action to foreclose a mortgage or recover any part of the mortgage debt is adjudicated to be barred by the applicable statute of limitations , any other action seeking to foreclose the mortgage or recover any part of the same mortgage debt shall also be barred by the statute of limitations.” The Court then noted that while legislative amendments should generally be applied prospectively, “remedial legislation should be given retroactive effect in order to effectuate its beneficial purpose.” (Citations and internal quotation marks omitted.) In this regard, the Court stated that: However, classifying a statute as 'remedial' does not automatically overcome the strong presumption of prospectivity. Rather, in determining whether a legislative amendment should be given retroactive effect, courts must consider whether the Legislature has made a specific pronouncement about retroactive effect or conveyed a sense of urgency; whether the statute was designed to rewrite an unintended judicial interpretation; and whether the enactment itself reaffirms a legislative judgment about what the law in question should be. The Legislature enacted FAPA to clarify existing law to ensure that statutes of limitations provide finality. In exercising its legislative judgment, the Legislature set forth the process available to noteholders to foreclose a mortgage, including the manner in which the statute of limitations may be tolled or restarted, while also ensuring that homeowners are not overburdened by having to defend multiple actions ad infinitum. Further, the Legislature clearly set forth that FAPA "shall take effect immediately and shall apply to all actions commenced on an instrument described under in which a final judgment of foreclosure and sale has not been enforced" For the foregoing reasons, we find that FAPA should be applied retroactively to effect its beneficial purpose. <(citations, internal quotation marks and brackets omitted.)> The Court went on to discuss that, in light of the Court of Appeals’ decision in in Freedom Mtge. Corp. v Engel , 37 N.Y.3d 1 (2021), there was an “urgent need to correct judicial interpretation with unintended consequences which allowed noteholders to unilaterally ‘manipulate statutes of limitations to their advantage’ and to the detriment of homeowners.” (Citation omitted.) In rejecting the lender’s position that its due process rights would be violated if FAPA was applied retroactively, the Court explained: Next, we turn to plaintiff's contention that a retroactive application of FAPA would violate its due process right to recover on the mortgage debt. To comport with the requirements of due process, retroactive application of a newly enacted provision must be supported by a legitimate legislative purpose furthered by rational means. This standard is not exacting, and the challenged legislation will survive so long as it is rationally related to any conceivable legitimate State purpose . Here, the Legislature rejected case law that would allow noteholders to abuse the foreclosure process by manipulating and extending the statute of limitations to the detriment of homeowners and it acted to overrule such case law. To prevent unintended results, the Legislature enacted FAPA to clarify the judicial process through which noteholders could recover on a mortgage debt, while also protecting homeowners from having to defend multiple foreclosure actions for lengths of time that far exceed the applicable statutes of limitations. As such clarifications are rationally related to the legitimate legislative purpose of providing a mechanism for parties to resolve their disputes with finality, we find that retroactive application of FAPA to foreclosure actions where a final judgment has not been enforced does not violate plaintiff's due process rights. Ultimately, the Court found that the loan was accelerated by the lender when it commenced the first foreclosure action and that it was not de-accelerated. Therefore, the six-year statute of limitations on the accelerated loan expired prior to the commencement of the second foreclosure action. Additionally, because the first and second foreclosure actions both “sought ‘to foreclose the same mortgage debt,’ such adjudication also renders the 2008 action ‘barred by the statute of limitations’” (RPAPL 1301 <4> ). (Some citations and internal ellipses omitted.) Accordingly, the Court held that the motion court “should have denied plaintiff's motion to restore the 2008 action to the calendar”. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Eds. Note: this BLOG has written numerous articles addressing all aspects of residential mortgage foreclosure. To find BLOG articles related to mortgage foreclosure, visit the “ Blog ” tile on our website and enter “foreclosure” (or any related topic of interest) in the “search” box. Eds. Note: On December 19, 2023, the Appellate Division, First Department, in Genovese v. Nationstar Mortgage LLC , 223 A.D.3d 37 (2023), held that FAPA is to be applied retroactively. However, the First Department could not consider the lender’s “constitutional challenges to the retroactive application of FAPA under the Contract and Due Process Clauses of the Federal Constitution because, as plaintiff notes in her reply brief, defendant has not notified the Attorney General of those challenges ( see CPLR 1012 ).” Genovese , 223 A.D.3d at 45. This Blog wrote about Genovese < here =">here"> . Eds. Note: this BLOG has written numerous articles addressing issues in foreclosure actions related to the interrelationship between the statute of limitations, acceleration and de-acceleration. To find BLOG articles related to these issues, visit the “ Blog ” tile on our website and enter “statute of limitations,” “acceleration” and/or “de-acceleration” in the “search” box. This BLOG has previously written about Engel . See, e.g. , < here =">here"> and < here =">here"> .

By: Jeffrey M. Haber Statutes of limitations limit the time within which a defendant can be held liable for any type of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitations period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run is an important issue to consider before commencing an action. Important to this consideration is ascertaining when the claim sought to be asserted accrued. In cases involving a claim for breach of fiduciary duty – one of the claims asserted in Hammer v. Heller , 2024 N.Y. Slip Op 33658(U) (Sup. Ct., N.Y. County Oct. 15, 2024) ( here ) – accrual occurs as soon as “the claim becomes enforceable — when all elements of the tort can be truthfully alleged in a complaint.” “Given that damage stemming from the misconduct is an essential element of a breach of fiduciary duty claim, the claim is not enforceable, and thus does not accrue until damages are sustained.” e.g.,="(e.g.," here=">here" and="and" >here).=">here)." also="also" about="about" accrual="accrual" claims,="claims," including="including" claims="claims" duty,="duty," e.g. ,="e.g.," >here,=">here," >here.=">here."> In cases involving a request for declaratory relief, also sought in Hammer , the claim accrues “when there is a bona fide, justiciable controversy between the parties.” “A dispute matures into a justiciable controversy when a plaintiff receives direct, definitive notice that the defendant is repudiating his or her rights.” Hammer v. Heller Hammer involved a dispute among three siblings concerning their rights and interests in three family general partnerships. The dispute before the motion court concerned the parties’ interests in Langfan. At the time of Langfan’s formation, each sibling owned a 33% interest in the partnership. In or around February 2011, Dayna, without allegedly informing Robin, directed Langfan’s accountant, Seymour Kahan, to remove Robin as a partner of the partnership. Kahan allegedly followed Dayna’s instructions based on her representation that Robin consented to the change. Kahan consequently filed Langfan’s 2010 income tax return to indicate that only Dayna and Mark were owners of Langfan. Robin’s Schedule K-1 was, in turn, also amended to reflect her partnership interest being reduced from 33.333% to 0 %, while both Mark and Dayna’s shares increased to 50%. In the years that followed, Langfan’s tax returns continued to list only Mark and Dayna as owners of the partnership. Plaintiffs alleged that defendant never informed Robin about her purported removal as a partner from Langfan, nor did defendant obtain Robin’s consent or otherwise document Robin’s removal as a partner. Instead, in 2022, Mark notified Robin, after his discussions with Dayna following the death of William, that he learned that Robin had been removed from the Langfan partnership. The next year, in the middle of 2023, Mark reviewed Langfan’s tax return history, discovered that Robin no longer appeared in those tax filings, and informed Robin of his findings. Dayna later confirmed to Robin that she had removed Robin from the Langfan partnership. According to Robin, Dayna represented in an email that she removed Robin from the Langfan partnership so that Dayna’s family could obtain a more advantageous health insurance plan. Plaintiffs characterized Dayna’s conduct as a fraud on Robin. Defendant moved to dismiss two causes of action asserted by plaintiffs – declaratory judgment and breach of fiduciary duty – as being time-barred. Defendant contended that the declaratory judgment cause of action (concerning Robin’s removal as a partner) accrued in or around 2011 and, therefore, was barred under CPLR 213(1). Defendants also contended that the breach of fiduciary duty claim was barred because the claim accrued in or around 2011. Defendant maintained that the statute of limitations for the claim was three years. As discussed below, the motion court granted in part and denied in part the motion. In New York, there is “no general period of limitation for a declaratory judgment action.” “ o determine the appropriate limitations period for a declaratory judgment action, it is necessary to examine the substance of action to identify the relationship out of which the claim arises and the relief sought.” If the court finds the action can be resolved through a form of proceeding for which a specific limitation period is statutorily provided, then the statute of limitation for that proceeding will be applied. If no other form of proceeding exists for resolving the claim, then the six-year limitations period in CPLR 213(1), the catch-all provision, applies. In Hammer , the parties did not dispute that plaintiffs’ declaratory relief claim was subject to a six-year statute of limitations period. Instead, the parties disputed when the claim accrued. As noted, “ n action for declaratory relief accrues when there is a bona fide, justiciable controversy between the parties.” “A dispute matures into a justiciable controversy when a plaintiff receives direct, definitive notice that the defendant is repudiating his or her rights.” The motion court found that the claim accrued in 2022, not in 2011. The motion court explained that although the alleged removal of Robin from the Langfan partnership occurred in or around February 2011, it was not until 2022 that she had “direct, definitive notice” of Defendant’s purported repudiation of her partnership rights. The motion court also found that plaintiff had “sufficiently established … that, although actions occurred in 2011, a justifiable controversy only crystalized in 2022 when informed Mark that Robin was not a partner of Langfan.” Therefore, said the motion court, plaintiff’s “declaratory judgment appear to be within CPRL 213(l)’s six-year limitations period.” However, the motion court dismissed the breach of fiduciary duty cause of action, holding that the claim accrued in 2011. In New York, a cause of action for breach of fiduciary duty is subject to a three-year statute of limitations when “the remedy sought is purely monetary in nature.” When a fiduciary duty claim is primarily “based on allegations of actual fraud,” the six-year/two-year from discovery limitations period set forth in CPLR 213(8) applies. However, where the fraud allegations are only incidental to the fiduciary duty claim, courts will not apply the fraud statute of limitations. In Hammer , plaintiffs alleged that defendant breached her fiduciary duties by unilaterally removing Robin as a partner from Langfan and, in turn, causing Langfan to file federal income tax returns that listed only Mark and defendant as co-owners of the partnership. Plaintiffs sought monetary damages for the alleged breach “in an amount not less than 33% of the total valuation of Langfan.” “Given these allegations,” concluded the motion court, “the statute of limitations on plaintiffs’ plainly began to run in 2011 and expired in 2014, i.e., well before th action was filed in 2023.” The motion court rejected plaintiffs’ argument that their breach of fiduciary duty claim was based on defendant’s alleged fraud, which Robin claimed not to have discovered until 2022, thereby bringing the breach of fiduciary duty claim within the two-year discovery rule in CPLR 213(8). In doing so, the motion court found the allegations to be “bald and conclusory characterizations,” which “plaintiffs not explain in any detail how, if at all, conduct was fraudulent.” “ t any rate,” said the motion court, “plaintiffs’ conclusory assertions fail to establish that purported fraudulent conduct was anything more than incidental to the primary conduct underlying their fiduciary duty claim: alleged unwarranted removal of Robin from the Langfan partnership.” Accordingly, the motion court dismissed the breach of fiduciary duty claim as time-barred. ________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. IDT Corp. v. Morgan Stanley Dean Witter & Co. , 12 N.Y.3d 132, 140 (2009). Grika v. McGraw , 55 Misc. 3d 1207(a) (Sup. Ct., N.Y. County 2016), aff’d sub nom. , L.A. Grika on behalf of McGraw , 161 A.D.3d 450 (1st Dept. 2018); see also IDT , 12 N.Y.3d at 140 (“date of damages is measured from when the plaintiff first suffered loss”). Trump Vill. Section 4, Inc. v. Young , 217 A.D.3d 711, 714 (2d Dept. 2023). Zwarycz v. Marnia Constr., Inc. , 102 A.D.3d 774, 776 (2d Dept. 2013). The siblings are: plaintiffs Robin Langfan Hammer (“Robin”) and Mark Langfan (“Mark”) and defendant Dayna Langfan Heller (“Dayna”). The first partnership is Abnet Realty Company (“Abnet”), a commercial real estate business founded by William K. Langfan (“William”), the siblings’ father. Abnet is governed by a First Amended General Partnership Agreement, dated February 10, 2004. Its two general partners are currently RMD Associates (“RMD”), Abnet’s Managing Partner, and Mark, as Trustee of non-party William K. Langfan Revocable Trust. The second partnership is RMD, which is an oral partnership owned in equal thirds by plaintiffs and defendant. RMD was formed in 1990 to perpetually hold a 50% general partnership interest in Abnet. The third partnership is Langfan Company (“Langfan”), an oral partnership formed in 1990 for the purpose of paying salaries and administering healthcare benefits for nonfamily and family employees managing Abnet’s various real properties, as well as paying for incidental office-related expenses. Vigilant Ins. Co. of Am. v. Housing Auth. of City of El Paso, Tex ., 87 N.Y.2d 36, 40·41 (1995) (internal quotation marks and citations omitted);  Rosenthal v. City of N.Y. , 283 A.D.2d 156, 157-158 (1st Dept. 2001) (internal quotation marks and citation omitted); see also Gress v. Brown , 20 N.Y.3d 957, 959 (2012). See Solnick v. Whalen , 49 N.Y.2d 224, 229-30 (1980). Id. at 230; s ee also Saratoga Cnty. Chamber of Com. v. Pataki , 100 N.Y.2d 801, 815 (2003). Trump Vill. , 217 A.D.3d at 714. Zwarycz , 102 A.D.3d at 776. Slip Op. at *5. Id. Id. Id. at *6. IDT , 12 N.Y.3d at 139; Romanoff v. Romanoff , 148 A.D.3d 614, 616 (1st Dept. 2017). Wimbledon Fin. Master Fund, Ltd v. Hallac , 192 A.D.3d 617, 618 (1st Dept. 2021). Romanoff , 148 A.D.3d at 616. Slip Op. at *6. Id. Id. Id. Id. (citing CPLR 3016(b)). Id. Id.

By: Jeffrey M. Haber In today’s post, we examine Student Loan Solutions, LLC v. Colon , 2024 N.Y. Slip Op. 05125 (2d Dept. Oct. 16, 2024) ( here ), a case involving the collection of student loan debt and the statute of limitations applicable to such collection efforts when the plaintiff is a nonresident suing on a cause of action accruing outside New York. As noted, Student Loan Solutions involved the collection of student loan debt. In 2007, defendants entered into a private loan credit agreement (the “loan agreement”) with Bank of America, N.A. (“Bank of America”), pursuant to which defendants borrowed $38,000 to be repaid with interest in monthly installments over a period of 20 years after an initial period of deferment. The loan agreement provided that if defendants failed to make any monthly payment when due, Bank of America had “the right to give notice that the whole outstanding principal balance, accrued interest, and all other amounts payable to … due and payable at once.” In 2017, plaintiff purchased Bank of America’s interest in the loan agreement. On June 4, 2019, plaintiff commenced the action to recover the outstanding amount owed under the loan agreement, alleging that defendants were in default of the loan agreement by failing to make payments when due. Defendants served an answer in which they asserted, as an affirmative defense, that the statute of limitations had run prior to the commencement of the action. Plaintiff moved for summary judgment on the complaint, and defendants cross-moved for summary judgment dismissing the complaint, arguing that it was time-barred. In an order dated December 10, 2020, the motion court denied plaintiff’s motion and granted defendants’ cross-motion. Plaintiff appealed. The Appellate Division, Second Department affirmed, holding that the action was time barred. When a loan is payable in installments, as in Student Loan Solutions , there are separate causes of action for each installment accrued. The statute of limitations begins to run on the date each installment becomes due and is defaulted upon, unless the debt is accelerated. Once a debt is validly accelerated in accordance with the terms of the contract, the entire amount is due, and the statute of limitations begins to run on the entire debt. To accelerate a loan payable in installments, “ borrower … must be provided with notice of the lender’s decision to exercise an option to accelerate the maturity of a loan, and such notice must be clear and unequivocal.” “ o constitute such clear and unequivocal acceleration of a debt, the notice must demand an immediate payment of the entire outstanding loan and not refer to acceleration only as a future event.” The Court found that defendants had “established, prima facie, that the statute of limitations began to run on the cause of action on September 11, 2013.” The Court pointed to a September 11, 2013 letter from Bank of America’s attorney in which the attorney “informed the defendants that had been retained to collect the ‘total amount’ in connection with the defendants’ ‘delinquent’ debt,” and “that the defendants … should send ‘the balance in full’ or contact ‘with respect to a full resolution.’” The Court held that “this letter constituted an affirmative action clearly and unequivocally evidencing Bank of America’s intention to accelerate the debt, as the letter demanded immediate payment of the entire outstanding loan and did not refer to acceleration of the loan as a future event.” The Court also held that defendants “established, prima facie, that action was time-barred under the applicable statute of limitations.” “When a nonresident sues on a cause of action accruing outside New York, CPLR 202 requires the cause of action to be timely under the limitation periods of both New York and the jurisdiction where the cause of action accrued.” “‘ cause of action accrues at the time and in the place of the injury.’” A cause of action alleging a purely economic injury usually accrues in the state in which the plaintiff resides and sustains the economic impact of the loss. In Student Loan Solutions , the parties agreed that Bank of America was headquartered and injured in North Carolina. Thus, said the Court, “since the cause of action accrued in 2013 when Bank of America held the loan agreement, North Carolina’s three-year statute of limitations for breach of contract actions applie to this action.” “As the plaintiff did not commence action to collect the debt until June 4, 2019, more than three years after the cause of action accrued,” the Court found that “defendants met their prima facie burden of demonstrating that this action was time-barred.” Takeaway “‘A defendant who seeks dismissal of a complaint on the ground that it is barred by the statute of limitations bears the initial burden of proving, prima facie, that the time in which to commence an action has expired. The burden then shifts to the plaintiff to present evidence raising a triable issue of fact as to whether the action falls within an exception to the statute of limitations’ or whether the statute of limitations has been tolled.’” In Student Loan Solutions , defendants met their burden; plaintiff was unable to raise a triable issue of fact that the statute of limitations had not run. Student Loan Solutions reaffirms the principle that when a nonresident sues on a cause of action accruing outside New York, it must be timely under the limitation periods of both New York and the jurisdiction where the cause of action accrued. As the Court of Appeals observed, “ his prevents nonresidents from shopping in New York for a favorable Statute of Limitations.” In Student Loan Solutions , the statute of limitations had run as the limitations period for breach of contract under North Carolina law – the “state in which the plaintiff reside and sustain the economic impact of the loss” – was three years. Plaintiff commenced the action in 2019, more than three years after Bank of America accelerated the loan.    __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Morrison v. Zaglool , 88 A.D.3d 856, 858 (2d Dept. 2011); Sce v. Ach , 56 A.D.3d 457, 458 (2d Dept. 2008). Nationstar Mtge., LLC v. Weisblum , 143 A.D.3d 866, 867 (2d Dept. 2016); Wells Fargo Bank, N.A. v. Burke , 94 A.D.3d 980, 983 (2d Dept. 2012); EMC Mtge. Corp. v. Patella , 279 A.D.2d 604, 605 (2d Dept. 2001). Bank of N.Y. Mellon v. Dieudonne , 171 A.D.3d 34, 38 (2d Dept. 2019) (citations and internal quotation marks omitted); see also Wells Fargo Bank, N.A. , 94 A.D.3d at 983. Sansone v. North Shore Invs. Realty Group, LLC , 218 A.D.3d 698, 700 (2d Dept. 2023); see also Freedom Mtge. Corp. v. Engel , 37 N.Y.3d 1, 27 (2021). Slip Op. at *2. Id. Id. (citations omitted). Id. Global Fin. Corp. v. Triarc Corp. , 93 N.Y.2d 525, 528 (1990); see also CPLR 202; Grynberg v. Giffen , 119 A.D.3d 526, 527 (2d Dept. 2014). Deutsche Bank Natl. Trust Co. v. Barclays Bank PLC , 34 N.Y.3d 327, 338 (2019) (quoting Global Fin. , 93 N.Y.2d at 529). Global Fin. , 93 N.Y.2d at 528. Slip Op. at *2. Id. (citations omitted). Id. Cammarato v. 16 Admiral Perry Plaza, LLC , 216 A.D.3d 903, 904 (2d Dept. 2023) (quoting Osborn v. DeChiara , 165 A.D.3d 1270, 1271 (2d Dept.2018)); see also Tantleff v. Kestenbaum & Mark , 131 A.D.3d 955, 958 (2d Dept. 2015). Global Fin. , 93 N.Y.2d at 528. See also CPLR 202 (“An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.”). Global Fin. , 93 N.Y.2d at 528 (citation omitted). Slip Op. at *2.

By: Jonathan H. Freiberger A notice of pendency (or lis pendens ) is a provisional remedy available to litigants seeking a judgment that affects title to real property. 5303 Realty Corp. v. O&Y Equity Corp. , 64 N.Y.2d 313 (1984). The purpose of a notice of pendency is to put defendants and the world on notice of the full scope of the rights claimed by plaintiffs to defendants’ real property. Sjogren v. Land Assoc., LLC , 223 A.D.3d 963, 965 (3 rd Dep’t 2024). Notices of pendency are governed by Article 65 of the CPLR. This BLOG has previously discussed notices of pendency in a variety of different contexts. See, e.g ., < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . Among others, the filing of notices of pendency is typical in mortgage foreclosure actions and actions for specific performance of real estate contracts. Conversely, in an action for the return of a downpayment related to the sale of real property, the contract vendee was not entitled to a notice of pendency because the complaint sought only money damages and, accordingly, any resulting judgment would not “affect the title to, or the possession, use or enjoyment of, real property.” Mallek v. Felmine , 227 A.D.3d 977, 978 (2 nd Dep’t 2024). Because the “ability to file a notice of pendency is a privilege that can be lost if abused,” once lost a successive notice of pendency may not be filed after the initial notice is cancelled. In re Sakow , 97 N.Y.2d 436, 441 – 42 (2002) (citations omitted). Moreover, an application to extend a notice of pendency must be made “prior to the expiration of the prior notice” and an expired notice, without extension is a “nullity”. Sakow , 97 N.Y.2d at 442 (citations omitted). The “no second chance” rule applies whether the notice expires or is cancelled. Id . An exception to the “no second chance” rule is found in CPLR 6516 , which permits successive notices of pendency in mortgage foreclosure actions because RPAPL 1331 requires that a notice of pendency must be filed “at least twenty days before a final judgment directing a sale is rendered”. On October 16, 2024, the Appellate Division, Second Department, decided Underhill Venture, LLC v. Sarang , in which the Court addressed an interesting issue – whether a party to a contract can waive the right to file a notice of pendency. The parties in Underhill entered into a contract pursuant to which the plaintiff was to build a house on certain property and sell the land and the house to the defendant. After an alleged payment default, the plaintiff commenced an action against the defendant “to declare the contract null and void and to retain the defendants' down payment.” The defendants interposed counterclaims for damages and filed a notice of pendency. The plaintiff, inter alia , moved to cancel the notice of pendency and the motion court denied the motion. Using rules of contract interpretation , the Second Department reversed because the parties’ contract expressly prohibited the filing of notices of pendency. In so doing, the Court stated: Turning to the merits, with respect to the order dated September 21, 2023, the Supreme Court erred in denying that branch of the plaintiff's motion which was to cancel the notice of pendency ( see CPLR 6501 ; Matter of Sakow , 97 NY2d 436, 441). Here, the parties agreed in a rider to the contract that "the right to file a Lis Pendens in any action is hereby waived irrevocably." " hen parties set down their agreement in a clear, complete document, their writing should . . . be enforced according to its terms," and " n the absence of any ambiguity, we look solely to the language used by the parties to discern the contract's meaning" ( Vermont Teddy Bear Co. v 538 Madison Realty Co. , 1 NY3d 470, 475 ). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Eds. Note: this BLOG has written numerous articles addressing all aspects of residential mortgage foreclosure. To find BLOG articles related to foreclosure, visit the “ Blog ” tile on our website and enter “foreclosure” (or any related topic of interest) in the “search” box. Eds. Note: this BLOG has written numerous articles addressing specific performance of real estate contracts . To find BLOG articles related to specific performance of real estate contracts, visit the “ Blog ” tile on our website and enter “specific performance” in the “search” box. Eds. Note: this BLOG has addressed the issue of successive notices of pendency in mortgage foreclosure actions < here =">here"> and < here =">here"> . Eds. Note: this BLOG has written numerous articles addressing contract interpretation . To find BLOG articles related to contract interpretation, visit the “ Blog ” tile on our website and enter “contract interpretation” (or any related topic of interest) in the “search” box.

By: Jeffrey M. Haber Artificial intelligence (“AI”) is everywhere. A person cannot watch television, listen to a podcast or read a newspaper without hearing about AI. As a new and emerging technology, AI is exciting. Its applications and capabilities are endless. But, in the wrong hands, AI can be dangerous. Recently, the Securities and Exchange Commission (“SEC”) issued an Investor Alert about AI and the risk of fraud (the “Alert”) (here). The SEC, along with the North American Securities Administrators Association, and the Financial Industry Regulatory Authority, issued the Alert to “make investors aware of the increase of investment frauds involving the purported use of artificial intelligence (AI) and other emerging technologies.” As noted in the Alert, “ndividual investors should know that bad actors are using the growing popularity and complexity of AI to lure victims into scams.” In the Alert, the SEC identified “a few things to look out for to help keep money safe from frauds.” Some of the AI and AI-related fraud includes: Unregistered/Unlicensed Investment Platforms Claiming to Use AI First and foremost, investors should remember that federal, provincial, and state securities laws generally require securities firms, professionals, exchanges, and other investment platforms to be registered. A promoter’s lack of registration status should be taken as a prompt to do additional investigation before you invest any money. Numerous unregistered and unlicensed online investment platforms, as well as unlicensed and unregistered individuals and firms, are promoting AI trading systems that make unrealistic claims like, “Our proprietary AI trading system can’t lose!” or “Use AI to Pick Guaranteed Stock Winners!” In reality, these scammers are running investment schemes that seek to leverage the popularity of AI. Investing in Companies Involved in AI While rapid technological change can create investment opportunities, bad actors often use the hype around new technological developments, like AI or crypto assets, to lure investors into schemes. These bad actors might use catchy AI-related buzzwords and make claims that their companies or business strategies guarantee huge gains. Red flags of these types of scams include high-pressure sales tactics by unregistered individuals, promises of quick profits, or claims of guaranteed returns with little or no risk. AI-Enabled Technology Used to Scam Investors, Including “Deepfake” Video and Audio Fraudsters can use AI technology to clone voices, alter images, and even create fake videos to spread false or misleading information. AI technology might be used to impersonate a family member or friend, with the intent to convince an investor to transfer money or securities out of an investment account. For example, some scam artists are using AI-generated audio — also known as “deepfake” audio — to try to lure older investors into thinking a grandchild is in financial distress and need of money. Scammers might use deepfake videos to imitate the CEO of a company announcing false news in an attempt to manipulate the price of a stock, or might use AI technology to produce realistic looking websites or marketing materials to promote fake investments or fraudulent schemes. In addition, we regularly see bad actors impersonating SEC staff and other government officials. In addition to identifying the foregoing, the Alert provided a number of steps for investors to use to protect themselves from unscrupulous advisors, promoters and fraudsters seeking to lure investors into scams relating to, or using, AI. On October 10, 2024, the SEC announced (here) charges against Rimar Capital USA, Inc. (“Rimar USA”), Rimar Capital, LLC (“Rimar LLC”), and certain of their officers and directors (collectively, the “respondents”) for making false and misleading statements about Rimar LLC’s purported use of artificial intelligence to perform automated trading for client accounts and numerous other material misrepresentations. As noted in the SEC’s press release, respondents agreed to settle the SEC’s charges and pay $310,000 in total civil penalties. According to the SEC, the individual respondents raised nearly $4 million from 45 investors for the development of Rimar LLC, an investment adviser that was falsely described as having an AI-driven platform for trading securities. The SEC found that the Rimar entities and the individual respondents also made misrepresentations about Rimar LLC’s assets under management and its investment returns. In addition, the SEC found that Rimar LLC and one of the individual respondents obtained advisory clients using the misleading statements and that the same individual respondent improperly used company funds for personal expenses. “Through entities he controlled, lured investors and clients with multiple fabrications, including with buzzwords about the latest AI technology,” said Andrew Dean, Co-Chief of the SEC’s Asset Management Unit. “As AI becomes more popular in the investing space, we will continue to be vigilant and pursue those who lie about their firms’ technological capabilities and engage in ‘AI washing’.” Without admitting or denying the SEC’s findings, respondents consented to the entry of an order (here) finding antifraud violations and to cease and desist from violating the charged provisions. The officer respondent consented to pay disgorgement and prejudgment interest totaling $213,611, to pay a $250,000 civil penalty, and to be subject to an investment company prohibition and associational bar with the right to reapply in five years. The director respondent agreed to pay a $60,000 civil penalty. Rimar LLC consented to be censured. _______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Investor Alert: Artificial Intelligence (AI) and Investment Fraud: Investor Alert, SEC.gov (Jan. 25, 2024).

By: Jeffrey M. Haber “Spoofing is a type of scam in which criminals attempt to obtain someone’s personal information by pretending to be a legitimate business, a neighbor, or some other innocent party.” Spoofing can occur in any form of online communication, including emails, text messages, telephone calls, and websites. Id. Although spoofing comes in many forms, the goal of spoofing is the same: to deceive people into divulging personal and/or financial information that the scammers can exploit for their personal gain. Common Spoofing Scams Email Spoofing Also known as “phishing”, email spoofing involves the transmission of emails having a falsified “From:” line. The point of the email is to trick the recipient into believing that the message comes from a legitimate source, such as a friend, a bank, or some other known business or entity. Text Message Spoofing Also known as “smishing”, text message spoofing is like email spoofing. The recipient receives a text message that appears to come from a legitimate source, such as a friend or the recipient’s bank, credit card company or phone company. The message typically requests the recipient to call a certain phone number or click on a link within the message, with the goal of inducing the recipient to divulge personal information. Caller ID Spoofing With Caller ID spoofing, the scammer falsifies the phone number from which he/she is calling to get the victim to take the call. The victim’s caller ID will show that the call is coming from a legitimate business or government agency, such as the Internal Revenue Service. As with other forms of spoofing, the goal of the scam is to induce the victim to divulge personal and/or financial information. URL Spoofing URL spoofing occurs when scammers create a fraudulent website to obtain information from victims or to install malware on their computers. For instance, victims might be directed to a website that appears to belong to their bank or credit card company and be asked to log in using their user ID and password. If the person falls for the request and logs in, the scammer has the victim’s information to log into the website of the legitimate entity or government agency and access the victim’s accounts. See Spoofing, supra. Market Spoofing “Spoofing” can also include a series of events in which a securities trader places and immediately cancels a quote in an attempt to trigger a market movement that the then takes advantage of to establish or liquidate a position. State differently, it is an act or practice of bidding or offering with the intent, at the time the bid or offer was placed, to cancel the bid or offer before it was executed to give the false appearance of genuine supply or demand to other market participants. Market spoofing is the subject of a settled enforcement proceeding commenced by the Securities and Exchange Commission (“SEC” or “Commission”) against TD Securities (USA) LLC, a registered broker- dealer that is headquartered in New York for allegedly spoofing the U.S. Treasury cash securities market by entering orders on one side of the market that it had no intention of executing (herein, “non-bona fide orders”). The September 30, 2024, press release announcing the charges and settlement can be found here. In the Matter of TD Securities (USA) LLC According to the SEC, between April 2018 and May 2019, a former TD Securities trader spoofed the U.S. Treasury cash securities market by entering orders on one side of the market that he had no intention of executing, so he could obtain more favorable execution prices on bona fide orders he was entering simultaneously on the other side of the market. After the bona fide orders were filled, said the SEC, resulting in profits to TD Securities, the trader allegedly canceled the non-bona fide orders. The SEC found that TD Securities lacked adequate controls and that it failed to take reasonable steps to scrutinize the trader after receiving warnings of his potentially irregular trading activity. TD Securities consented to the entry of the SEC’s cease and desist order finding that it violated an antifraud provision of the federal securities laws and failed to reasonably supervise the trader. TD Securities was further ordered to cease and desist from future violations of the relevant antifraud provision, was censured, and was ordered to pay disgorgement of $400,000, prejudgment interest, and a civil penalty of $6.5 million. In a related matter, TD Securities entered into a deferred prosecution agreement (“DPA”) (here) with the U.S. Department of Justice (“DOJ”) and agreed to pay a total monetary sanction of more than $15 million as part of that agreement, of which $400,000 will be credited by disgorgement to the SEC (here). TD Securities separately agreed to pay a $6 million fine to the Financial Industry Regulatory Authority to resolve related charges. Commenting on the SEC’s enforcement action and settlement, Mark Cave, Associate Director in the SEC’s Division of Enforcement, stated: “Manipulative and deceptive trading undermines the integrity of our markets. Broker-dealers and other firms cannot ignore their employees’ manipulative conduct and must take meaningful steps to detect and prevent it. Today’s action results from our continuing commitment to combating illicit trading.” Regarding the DPA, Nicole M. Argentieri, Principal Deputy Assistant Attorney General and head of the Justice Department’s Criminal Division stated: “TD Securities placed hundreds of orders to buy and sell U.S. Treasuries that it never intended to execute, in order to deceive market participants and manipulate prices by creating the false appearance of supply and demand. Such efforts to profit through unlawful trading undermine public confidence in U.S. Treasuries markets and defraud other market participants. The Criminal Division is committed to ensuring the integrity of our financial markets and holding accountable those who engage in deceptive trading practices.” _________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See Julia Kagan, Spoofing, Investopedia (updated June 29, 2024) (“Spoofing”) (here).

By: Jeffrey M. Haber In today’s Fraud Notes, we examine two cases involving claims of fraudulent inducement and fraudulent concealment.   In Board of Mgrs. of 570 Broome Condominium v. Soho Broome Condos LLC , 2024 N.Y. Slip Op. 04804 (1st Dept. Oct. 3, 2024) ( here ), the Court examined a fraudulent inducement claim in connection with the purchase of a condominium unit. As discussed below, the Court held that plaintiff sufficiently alleged that defendant asserted affirmative misrepresentations about the financial condition of the building that induced plaintiff to purchase the unit at issue. The Court also held that the misrepresentations did not duplicate the representations in the offering plan. In Haart v. Scaglia , 2024 N.Y. Slip Op. 04812 (1st Dept. Oct. 3, 2024) ( here ), the Court examined a fraudulent inducement and fraudulent concealment complaint in the context of a bitter business and marital breakup. As discussed below, the Court found, among other things, that plaintiff alleged actionable misrepresentations of existing fact, as opposed to inactionable representations of future performance and concealed certain facts from plaintiff in connection with the existence of preferred stock in a business that plaintiff allegedly owned. Board of Mgrs. of 570 Broome Condominium v. Soho Broome Condos LLC Plaintiff, a residential condominium, brought suit against, among others, the sponsor of the subject building (“condo” or “building”), alleging that the sponsor/developer of the condo failed to satisfy various promises made in connection with the offering plan related to the sale of the condo’s units. Plaintiff alleged that poor workmanship and faulty construction practices led to numerous deficiencies at the building for which the current board of managers must rectify. Plaintiff maintained that the sponsor and its principals deliberately misrepresented the condo’s budget and intentionally set common charges low to induce purchasers to buy units in the building. Plaintiff maintained that the shoddy construction work and the low common charges resulted in a massive assessment for the unit owners after only two years of operation as a condo. Plaintiff also alleged that the sponsor’s business partners looted the sponsor’s assets. Defendants moved to dismiss the complaint. Regarding the fraudulent inducement claim , the sponsor defendants maintained that the claim was nothing more than a breach of the offering plan dressed up as a fraud claim – that is, the fraud in the inducement claim was duplicative of the breach of contract claim. The individual defendants also claimed that they could only be liable for the alleged fraudulent inducement if plaintiff could pierce the corporate veil, which they maintained plaintiff failed to do. The motion court denied the motion with respect to the fraudulent inducement and breach of fiduciary duty claims. The motion court found that plaintiff asserted affirmative misrepresentations about the financial condition of the condo that were not made in the offering plan. In this regard, the motion court found that plaintiff detailed when the units were for sale, the fact that the condo’s operating expenses were deliberately low, and that when the units were nearly all sold, the condo’s expenses nearly doubled. In other words, noted the motion court, plaintiff alleged that the sponsor and the individual defendants deliberately misled potential purchasers about the budget until after the units were sold in order to get them to buy the units by, among other things, intentionally setting common charges at a level that did not cover the condo’s expenses. The motion court concluded that these allegations did not duplicate plaintiff’s breach of contract claim : Plaintiff’s claim is not simply reliant on the fact that the Sponsor breached the contract (the offering plan). It argues that these defendants made misrepresentations about the financial health of the condo in order to induce people to purchase units while (according to the complaint) there were questions about the condo’s ability to continue as a going concern. This is distinct from the failure to construct the building to meet certain parameters in the offering plan, such as the purportedly faulty piping and improper gas room venting. The motion court also rejected the notion that veil piercing was required to find the individual defendants liable (for pleading purposes) for fraud: “that the individual defendants signed the offering plan, which affirmatively represented that the condo’s budget was acceptable and appropriate to ensure the condo could meet its obligations,” stated a claim for fraudulent inducement. Finally, the motion court found that the individual defendants breached their fiduciary duty to plaintiff (and the other unitholders). In its complaint, plaintiff alleged that the individual defendants put the interests of the sponsor over those of the condo by keeping common charges low and directing the managing agent not to pay certain bills. Plaintiff argued that the individual defendants did this to make the units more attractive to potential purchasers (by keeping the common charges low) instead of fulfilling their fiduciary duty to the board. In addition, plaintiff detailed how the individual defendants refused to address the obvious construction defects and left plaintiff to fix the issues. The motion court held that the foregoing actions amounted to self-dealing in favor of the sponsor and constituted bad faith by the individual defendants. The motion court rejected the individual defendants’ reliance upon the business judgment rule as a basis to dismiss the complaint. Noting that the business judgment rule prohibits review of decisions within the scope of the authority of the board members, the motion court held that plaintiff alleged more than a mere disagreement with the decisions by the individual defendants. The motion court explained that plaintiff alleged that the individual defendants “made decisions that were anathema to running a functioning building” and “intentionally did not pay bills, did not set common charges at a level sufficient to cover expenses and did not address clear construction defects all to save money for and to benefit the Sponsor despite the fact that their duties were to the board.” “Maximizing the profit to the Sponsor and leaving the subsequent board to deal with financial issues,” concluded the motion court, “states a cause of action for the breach of a fiduciary duty.” On appeal, the Appellate Division, First Department affirmed the motion’s court order. The Court held that the “motion court correctly denied dismissal of plaintiff<’s> … fraud in the inducement claim against the individual defendants.” The Court found that “ laintiff alleged specific ‘affirmative misrepresentations, not omissions,’ by defendants, ‘who principals of the sponsor, and who signed the certification in the offering plan.” Such allegations concluded the Court, “set forth a scheme independent of the Martin Act disclosure requirements.” In addition, said the Court, “the allegations do not require piercing the corporate veil, as they are based on the affirmative misrepresentations by the individual defendants concerning the accuracy of the common charges and operating budget, which plaintiff asserts defendants knew to be false at the time.” The Court also held that the motion court “correctly sustained plaintiff’s breach of fiduciary duty claim against the individual defendants as members of the sponsor-controlled board.” The Court found that the “complaint sufficiently allege wrongdoing by the individual defendants in the form of self-dealing and willful misconduct, which were not actions ‘taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes,’ but rather solely for defendants’ benefit.” The Court explained that the “complaint specifically allege that rather than incrementally raise common charges to meet the condominium’s budget needs, the individual defendants directed the managing agent not to pay Con Edison bills, ignored the independent auditor’s warnings of a budget shortfall, refused to meet the staffing costs, used condominium monies to cover sponsor obligations, and intentionally set the common charges unreasonably low for no business related purpose but for the sponsor’s and the individual defendants' sole benefit.” The Court also noted that “ laintiff’s claims … supported by the allegation that the sponsor-controlled board raised the common charges and imposed a special assessment to pay for past due obligations only after the final sponsor-owned unit was in contract.” Haart v. Scaglia Haart was the fourth of five lawsuits filed by plaintiff and defendant during the last few years — one filed in Delaware and four in New York, all of which involved their personal and business divorce. Haart alleged that defendant defrauded her in two ways: fraudulent inducement and fraudulent concealment. In the former claim, plaintiff alleged that defendant represented that if she worked as CEO of Elite World Group, LLC (“EWG”), a model management company, without an employment agreement or salary, he would transfer to her 50% of the stock of a holding company – Freedom Holding, Inc. (“FHI”) – that owned EWG, in addition to an allegedly valuable apartment. Plaintiff allegedly agreed, and defendant transferred 50 common shares to her. However, according to plaintiff, defendant concealed the existence of 123,665 preferred shares he had issued to himself, thereby giving himself majority control of FHI and making plaintiff’s stock ownership virtually worthless. Consequently, plaintiff claimed that her interest in FHI amounted to a mere 0.0004% (50 of 123,765 total shares). Plaintiff further maintained that defendant and the accounting defendants repeatedly told her and others in her presence, in writing and orally, that she was a 50% owner of FHI. Plaintiff alleged that she discovered defendant’s misrepresentations about her ownership interest in FHI in March or April 2020. Upon learning the alleged truth, plaintiff maintains that she refused to continue working as CEO of EWG until defendant made her a 50% owner of FHI with equal ownership and control. In the latter claim, plaintiff alleged that defendant agreed to transfer 50% of the preferred shares to her, but he secretly directed the accounting defendants to draft a binding legal document to give her one less share of FHI and preserve his controlling interest. Defendant signed that document in June 2020 in the presence of both the accounting defendants and plaintiff. According to plaintiff, defendants told her that by doing so, defendant was transferring 50% of the preferred shares to her, knowing that he was, in fact, transferring one share less than 50%. Plaintiff maintained that thereafter, defendant continued to represent to her and others in her presence, both orally and in writing, that she owned 50% of FHI and shared equally in the control of the company with him. According to plaintiff, the accounting defendants and FHI repeated the foregoing representations, both orally and in writing. Plaintiff maintained that defendant and FHI prepared and submitted written documents to governmental entities, prospective investors, bankers, and auditors representing that he and plaintiff each owned 50% of FHI, while concealing the truth. Plaintiff claimed that she justifiably believed defendants. Plaintiff further alleged that the accounting defendants prepared and submitted FHI’s income tax returns in which the ownership of FHI was represented to 50% for each party. Based on defendants’ alleged concealment of the truth, plaintiff alleged that she continued to work as CEO of EWG. Defendants moved to dismiss. With regard to the fraud claims against defendant , the motion court granted the motion, finding that defendant did not make any actionable promise to make her a 50% partner. With regard to the fraud claims against the accounting defendants, the motion court granted the motion, finding that these parties did not have the capacity to either promise to transfer FHI ownership to plaintiff or appoint anyone as EWG’s CEO. On appeal, the Appellate Division, First Department unanimously modified the motion court’s order to deny the motions as to the first cause of action up to June 12, 2020 ( fraudulent inducement ) and the second cause of action (fraudulent concealment) to the extent it was based on the failure to disclose the existence of FHI’s preferred stock. The Court held that what started as a promise of future performance, which is not actionable, became a misrepresentation of existing fact, which is actionable. In this regard, the Court found that: when plaintiff agreed to become EWG’s CEO, promise to give her 50% of FHI was a promise about the future. However, plaintiff does not merely allege that she was induced to become CEO; she also alleges that she was induced to remain CEO without a salary or a contract for a fixed term because kept reassuring her that she owned 50% of FHI — which, at that point, would be a misrepresentation of an existing fact. Speaking to the justifiable reliance element of a fraud claim , the Court held that “it was not unreasonable for plaintiff to rely on statements that he was giving her 50% of FHI and that she owned 50% of it — he was her fiancé, and then her husband, when he said this.” “As such,” concluded the Court, “they were family members who stood in ‘a fiduciary relationship toward one another in a co-owned business venture,’ making plaintiff’s reliance on assurances ‘all the more reasonable.’” The Court held, however, that the claim should be reinstated only up to June 12, 2020. In so holding, the Court explained that, under the circumstances, plaintiff could not have been induced to continue serving as EWG’s CEO because “she executed a stock power which shows, on its face, that she was not getting 50% of the preferred shares”: Plaintiff discovered the existence of FHI’s preferred shares in April 2020. At that point, she knew that she did not own 50% of FHI; nevertheless, she continued to serve as EWG’s CEO without a regular contract or salary. Since promised to give her 50% of FHI’s preferred shares, it may have been reasonable for her to continue working as EWG’s CEO. On June 12, 2020, however, she executed a stock power which shows, on its face, that she was not getting 50% of the preferred shares. Because plaintiff continued serving as EWG’s CEO even after she knew that she was not a 50% owner of FHI, misrepresentation that she owned 50% of FHI could not have induced her to continue serving as CEO after June 12, 2020.… The Court also held that the fraudulent inducement claim against the accounting defendants should be reinstated “up to June 12, 2020.” The Court explained that “it be said, as a matter of law, that it was unreasonable for plaintiff to rely on the defendants’ statements about FHI, as they were its accountants. In addition, said the Court, the principal of the accounting defendants “was plaintiff’s accountant before he was FHI’s, and she considered him a friend and trusted advisor.” “While the defendants could not have induced plaintiff to accept the position of EWG’s CEO because they had no power to promise to give her 50% of FHI,” said the Court, plaintiff sufficiently alleged “that she was induced to continue being CEO because the defendants kept reassuring her that she owned 50% of FHI.” Among other things, plaintiff alleged that “for each tax year following receipt of the shares, prepared … tax returns identifying and as equal owners of FHI, with equal ‘total voting power.’” The Court also held that the second cause of action (for fraudulent concealment) “should be reinstated insofar as it is based on the concealment of the existence of FHI preferred stock.” “However,” noted the Court, “neither nor the defendants ‘concealed’ that plaintiff got less than 50% of the preferred shares because the stock power showed this on its face.” Finally, the Court rejected defendants’ argument that they had no duty to disclose the existence of the preferred shares. A duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter; (2) there is a fiduciary relationship between the plaintiff and defendant; or (3) the defendant possesses “special facts” about the matter not known by the plaintiff. In rejecting the argument, the Court held that defendant “had a duty to disclose the existence of the preferred stock because he had a confidential or fiduciary relationship with plaintiff …, and his superior knowledge of the existence of the preferred stock rendered plaintiff’s agreement to become EWG’s CEO without a regular salary or contract ‘inherently unfair.’” Regarding the accounting defendants, the Court held that “ hile the defendants did not have a duty to disclose based on a fiduciary relationship …, they arguably had a duty to disclose based on the ‘special facts’ doctrine.’” The Court found that “it was inherently unfair for plaintiff to work as EWG’s CEO on the assumption that she owned 50% of FHI when she owned only 50 common shares and FHI also had 123,665 preferred shares.” ____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. The motion court’s finding that plaintiff asserted affirmative misrepresentations, as opposed to omissions, is significant because a fraud claim based on omissions in an offering plan is barred by the Martin Act. See , e.g. , Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. P’ship , 12 N.Y.3d 236 (2009); Bd. of Managers of S. Star v. WSA Equities, LLC , 140 A.D.3d 405, 405 (1st Dept. 2016). “The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.” 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted). The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers.” Matter of Comverse Tech, Inc. Deriv. Litig. , 56 A.D.3d 49, 56 (1st Dept. 2008) (citation omitted). The complaint must “allege facts, such as self-dealing, fraud or bad faith” to show that the subject transaction “could not have been the product of sound business judgment.” Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016). Thus, “ o long as the corporation’s directors have not breached their fiduciary obligation to the corporation, the exercise of for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” Matter of Levandusky v. One Fifth Ave. Apt. Corp. , 75 N.Y.2d 530, 538 (1990) (internal quotation marks and citation omitted). Bd. of Mgrs. , Slip Op. at *1. Id. (quoting Bd. of Mgrs. of the Walton Condominium v. 264 H2O Borrower, LLC , 180 A.D.3d 622, 622 (1st Dept. 2020)). Id. (citing Bd. of Mgrs. of the S. Star v WSA Equities, LLC , 140 A.D.3d 405, 405 (1st Dept. 2016)). Id. Id. Id. (quoting Tahari v. 860 Fifth Ave. Corp. , 214 A.D.3d 491, 492 (1st Dept. 2023) (internal quotation marks omitted); and citing Bd. of Mgrs. of Fairways at N. Hills Condominium v. Fairway at N. Hills , 193 A.D.2d 322, 325 (2d Dept. 1993)). Id. Id. See Braddock v. Braddock , 60 A.D.3d 84, 89 (1st Dept. 2009). Haart , Slip Op. at *1. Id. Id. at *2. Id. (quoting Braddock , 60 A.D.3d at 88, 94). Id. Id. Id. (citation omitted). Id. Id. Id. Id. Id. Id. Bank of Am., N.A. v. Bear Stearns Asset Mgmt. , 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013). Balanced Return Fund Ltd. v. Royal Bank of Canada , 138 A.D.3d 542, 542 (1st Dept. 2016). Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010). “The ‘special facts’ doctrine holds that ‘absent a fiduciary relationship between parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.’” Greenman-Pedersen, Inc. v. Berryman & Henigar, Inc. , 130 A.D.3d 514, 516 (1st Dept. 2015), lv. denied , 29 N.Y.3d 913 (2017) (quoting, Pramer, 76 A.D.3d at 99). Haart , Slip Op. at *2-*3 (citations omitted). Id. at *3 (citations omitted). The Court further held that the third cause of action, against the accounting defendants for aiding and abetting defendant’s fraud, should be reinstated. Id. (citation omitted). The Court found that the accounting defendants provided substantial assistance to defendant by preparing plaintiff’s tax returns, which were “important to the underlying fraud.” Id. (citations omitted). Id. (citations omitted). Id.

By: Jeffrey M. Haber In Kapitus Servicing, Inc. v. MS Health, Inc. , 221 A.D.3d 504, 505 (1st Dept. Nov. 21, 2023) ( here ), the Appellate Division, First Department addressed the issue of whether a foreign limited liability company had the capacity to sue in New York due to defects in the entity’s corporate filings. In answering the question, the Court looked at the parties involved and who was the real party in interest with regard to the allegations asserted in the action.  The plaintiff in MS Health , Kapitus Servicing, Inc. (“Kapitus”), filed suit against, among others, MS Health Inc.—a subsidiary of Epazz, Inc. (“Epazz”), which was owned by Shaun Passley (“Passley”). MS Health claimed that Kapitus could not bring suit as the agent for TVT Capital, LLC (“TVT Capital”), a foreign limited liability company, because of purported defects in TVT Capital’s corporate filings in New York. The Court rejected the argument, holding that Kapitus had standing to bring the action in its own right because it was the real party in interest in the relief sought: MS Health failed to establish prima facia entitlement to summary judgment as Kapitus Servicing, as a contracting party, generally has a right to maintain an action in its own name (CPLR 1004). Notwithstanding its status as a servicing agent for TVT Capital, Inc., Kapitus had independent authority and its own beneficial interest in the subject agreement …. MS Health does not contest that Kapitus was a corporation registered in New York with its own independent capacity to file lawsuits. Moreover, Kapitus had a pecuniary interest in the agreement. Thus, Kapitus is a “real party in interest,” entitled to maintain this action in its own name…. Further, New York’s Limited Liability Company Law § 802 (b) (i) states that a foreign limited liability company’s failure to fully comply with the filing requirements does not impair the right of any other party to maintain an action. The same issue of capacity was before the Court in Kapitus Servicing, Inc. v. Epazz, Inc. , 2024 N.Y. Slip Op. 04741 (Oct. 1, 2024) ( here ). Epazz concerned a suit to enforce a settlement agreement, dated June 30, 2017, between plaintiff and defendants Epazz, Cynergy Corporation, and Passley (collectively, the “defendants”). The settlement agreement required defendants to pay to plaintiff’s predecessor in interest a sum certain in three monthly installments. In the event of default, plaintiff was entitled to enter judgment through a confession of judgment. It was undisputed that, after making some payments, defendants ceased making the remaining payments. On December 19, 2019, plaintiff sent a notice of default. Defendants failed to cure.  Plaintiff moved for summary judgment on its claims and to strike defendants’ counterclaim and affirmative defenses. Defendants moved to dismiss the complaint or alternatively for summary judgment on their counterclaim and to dismiss plaintiff’s claims. Defendants argued that plaintiff lacked the capacity to bring the action, claiming that the complaint was brought by Kapitus as the agent and servicing provider for TVT Capital, not in its own name, as a party to the settlement agreement, or as a third-party beneficiary of the settlement agreement. As TVT Capital’s agent, defendants argued that Kapitus was without authority to bring suit for TVT Capital because TVT Capital was without authority to commence the action. According to defendants, TVT Capital failed to publish and file its certificate of publication within 120 days of its filing (for a certificate of authority) as required under the Limited Liability Law. Defendants also argued that plaintiff breached the settlement agreement because it failed to remove a UCC lien on certain assets of the defendants. Defendants maintained that for one year following the execution of the settlement agreement, defendants had to make all payments due under the settlement agreement or have cured any default within 21 days in order for plaintiff to remove the UCC lien it filed against defendants. Defendants contended that it was undisputed that plaintiffs never sent a 21 day notice to cure in compliance with sections 2 and 3 of the settlement agreement during this time period. Therefore, said defendants, plaintiff breached the settlement agreement because it failed to remove the UCC lien. The motion court granted plaintiff’s motion for summary judgment and denied defendants’ motion to dismiss. First, the motion court rejected defendants’ argument that Kapitus lacked the capacity to sue. Relying on MS Health , supra , the motion court held that “it irrelevant whether TVT Capital ha the capacity to bring suit in New York, because it undisputed that Kapitus, who is the plaintiff, has capacity as a registered corporation with active standing to file suit.”   Second, the motion court rejected defendants’ breach of contract argument, finding that their reading of the settlement agreement “eviscerate ” the meaning of the clause on which they relied. Their reading eviscerates the first clause of section 7 which allowed for lien removal if defendants made ALL payments due under this agreement. Their reading also eviscerates plaintiff’s right to receive an entire year of payments before removing the lien.  If all defendants had to do for lien removal was to cure after a default notice, there would be no reason to have the clause about paying within a year or making all scheduled payments for the year.  “At bottom,” concluded the motion court, “defendants have conceded that they did not pay all amounts due under the settlement agreement and have therefore admitted their own breach.” Since plaintiff “offered sworn testimony and documentary evidence regarding its damages in a sum certain,” the motion court granted plaintiff’s motion and denied defendants’ motion. On appeal, the Appellate Division, First Department unanimously affirmed. The Court held that the “action was not subject to dismissal for lack of capacity, for substantially the same reasons stated in recent decision” in MS Health , supra . “Regardless of whether TVT Capital LLC, a foreign limited liability company, was barred from initiating suit in New York ( see Limited Liability Company Law § 802 ),” said the Court, plaintiff was a “real party in interest” entitled to maintain the action in its own name. The Court explained that “ otwithstanding its status as a servicing agent for TVT, Kapitus was a signatory to the subject settlement agreement and had a pecuniary interest in the underlying financing agreements.” As such, concluded the Court, plaintiff was “a ‘real party in interest’ entitled to maintain th action in its own name.” Additionally, the Court held that “Kapitus … indisputably had the right to bring suit on TVT’s behalf,” notwithstanding the latter’s noncompliance with Limited Liability Company Law § 802 : “a foreign limited liability company’s noncompliance with filing requirements ‘shall not limit or impair … the right of any other party to maintain any action or special proceeding on any such contract, act or omission.’” Finally, the Court held that the “motion court correctly concluded that defendants did not comply with their obligations under ¶ 7 of the settlement agreement such that plaintiff’s obligation to remove liens was triggered.” “It is undisputed,” explained the Court, “that defendants did not make all payments due under the settlement agreement within the first year it was in effect, nor did they cure these defaults within this period.” __________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. 221 A.D.3d at 505 (citations omitted) Slip Op. at *1 Id. Id. (citing CPLR 1004; Airlines Reporting Corp. v. Pro Travel , 239 A.D.2d 233, 234 (1st Dept. 1997)). Id. Id. Id.

By:  Jeffrey M. Haber In Rabinowitz v. Clarke , 2024 N.Y. Slip Op. 04627 ( st Dept. Sept. 26, 2024) ( here ), the Appellate Division, First Department addressed legal principles and causes of action that are familiar to readers of this Blog: fraud, the particularity requirement of CPLR 3016(b), the statute of limitations applicable to fraud claims, breach of contract and the duplication doctrine. We examine Rabinowitz below. Rabinowitz arose from plaintiff providing defendant with $60,000.00 on October 5, 2016, in furtherance of a real estate investment for the benefit of both parties . However, instead of using the $60,000.00 for the agreed upon purpose, plaintiff alleged that defendant used the money for his own personal use. Plaintiff sought the return of the $60,000.00, plus interest and other related expenses as a result of defendant’s alleged breach of contract and fraud. Plaintiff filed the summons and verified complaint on June 4, 2021. Plaintiff moved for an order striking defendant’s affirmative defenses; and defendant cross-moved for an order to dismiss the complaint pursuant to CPLR 3211 (a) (5), and (a) (7), and CPLR 3016 (b). In the cross-motion, defendant argued that the complaint should be dismissed on the grounds that the applicable statute of limitations barred the action, the complaint failed to state a cause of action, the fraud claim was not pleaded with the requisite particularity, and that plaintiff’s claim for unjust enrichment was duplicative of plaintiff’s breach of contract claim. Defendant alleged that plaintiff’s breach of contract claim was conclusory and omitted the terms of the alleged agreement . Defendant maintained that the complaint was not clear as to the terms of any contract between the parties, particularly with respect to the $60,000.00 payment. Thus, without identifying the terms of the agreement between the parties, defendant maintained that there could be no claim for breach of contract. Without such a claim, said defendant, plaintiff could not take advantage of the six-year statute of limitations. Plaintiff countered by alleging that there was an agreement between the parties pursuant to which defendant provided $60,000.00, thereby establishing defendant’s performance thereunder. Plaintiff claimed that defendant breached the agreement by not using the $60,000.00 to purchase real estate and by not returning the money to plaintiff. Without much discussion, the motion court held that plaintiff stated a claim for breach of contract. As such, the motion court held that the claim was timely brought. Regarding the fraud claim, defendant argued that plaintiff failed to plead fraud with particularity as required under CPLR 3016(b). Defendant maintained that plaintiff provided no details about the nature of the alleged fraud, or how and why plaintiff was misled by it. According to defendant, plaintiff’s fraud allegations were conclusory and insufficient to support the claim . Plaintiff argued that defendant tricked him into paying $60,000.00 by misrepresenting that defendant would invest the money in real estate. Plaintiff maintained that the complaint identified the who, what, when and how of the alleged fraud. Plaintiff also alleged that he relied on the misrepresentations and gave $60,000.00 to defendant in reliance on the alleged misrepresentations. Plaintiff maintained that the complaint and the documents submitted in opposition to the motion sufficed to satisfy CPLR 3016(b ). Plaintiff further argued that since he stated a claim for fraud, the action (which was commenced in June 2021) was timely brought. The motion court agreed with plaintiff and denied the cross-motion. On appeal, the First Department unanimously affirmed the motion court’s order. The Court held that plaintiff’s fraud allegations were not conclusory “ ven if the complaint lack clarity in describing “the substance of the misrepresentations.” Plaintiff adequately alleged fraud so as to invoke the six-year limitation period under CPLR 213(8). Affording plaintiff the benefit of every possible favorable inference, the complaint alleges that, on October 5, 2016, plaintiff gave defendant $60,000 in furtherance of a real estate investment that defendant led plaintiff to believe was to be a valid transaction for the parties' mutual benefit. These allegations adequately identify, in nonconclusory fashion, “who made the misrepresentations" and “when the misrepresentations were made” …. Even if the complaint lacks clarity in describing “the substance of the misrepresentations” …, plaintiff alleges that defendant tricked into paying $60,000 by misrepresenting that defendant would invest the money in real estate. Therefore, said the Court, the foregoing allegations “sufficiently “inform ” defendant “with respect to the incidents complained of.” The Court also held that plaintiff “adequately alleged breach of contract so as to invoke the six-year limitation period under CPLR 213(2).” The Court explained that “plaintiff alleged that the parties agreed to form a partnership to purchase real estate in September 2016; that defendant was ‘given the sum of $60,000.00 on October 5, 2016,’ ‘under the guise of purchasing and renovating real property’; that plaintiff gave the money to defendant ‘in furtherance of the parties’ agreement to act as partners, to purchase and renovate real property’; and that defendant breached the agreement by using the money for himself rather than to purchase and renovate real property, causing a loss of $60,000 to plaintiff.” “These allegations,” concluded the Court, “sufficiently set forth facts constituting the basic elements of a breach of contract claim.” ______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. In opposition to the motion, plaintiff submitted a photograph of a $60,000.00 check from plaintiff to defendant and a partnership agreement signed by the parties. Defendant did not dispute the authenticity of those documents. Therefore, said the motion court, “the complaint, as supplemented by the documents that plaintiff submitted in opposition to defendant’s contained sufficient allegations to state a cause of action” for breach of contract. The motion court also noted that the partnership agreement included an arbitration clause. Since neither party sought to enforce it, the motion court declined to sua sponte do so. P.S. Fin., LLC v. Eureka Woodworks, Inc. , 214 A.D.3d 1, 10-11 (2d Dept. 2023); Sabr Chems. Group v. Northeast Chems. , 192 A.D.3d 647, 648 (1st Dept. 2021). Because plaintiff submitted the partnership agreement in opposition to the motion, the motion court held that plaintiff’s claim of unjust enrichment was duplicative of his claim of breach of contract. See Cooper, Bamundo, Hecht & Longworth, LLP v. Kuczinski , 14 A.D.3d 644, 645 (2d Dept. 2005); Shear Enters., LLC v. Cohen , 189 A.D.3d 423, 424 (2d Dept. 2020). As such, the motion court dismissed plaintiff’s unjust enrichment claim. Under CPLR 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Conclusory allegations will not suffice. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Slip Op. at *1 (citing INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd. , 172 A.D.3d 492, 493 (1st Dept. 2019)). Id. (citation omitted). Id. (quoting Pludeman , 10 N.Y.3d at 491). Id. Id. Id. (citing Morris v. 702 E. Fifth St. HDFC , 46 A.D.3d 478, 479 (1st Dept. 2007)).

By: Jonathan H. Freiberger Partition is “the act or proceeding by which co-owners of property cause it to be divided into as many shares as there are owners, according to their interests therein, or if that cannot be equitably done, to be sold for the best obtainable price and the proceeds distributed according to the respective interests.” Chiang v. Chang , 137 A.D.2d 371, 373 (1 st Dep’t 1988) (citation and internal quotation marks omitted). Partition actions are governed by Article 9 of the Real Property Actions and Proceedings Law (“RPAPL”). RPAPL § 901 provides, inter alia , that a “person holding and in possession of real property as joint tenant or tenant in common, in which he has an estate of inheritance, or for life, or for years, may maintain an action for the partition of the property, and for a sale if it appears that a partition cannot be made without great prejudice to the owners.” RPAPL § 901(1). Addressing partition from an historical perspective, the First Department, in Chiang , recognized that “judicial partition” statutes “have existed in this country since the time of colonial governments” and, therefore, “so ancient is the history of judicial partitions, and so favored are partitions that it is now beyond contention that, independent of any statute, a court of equity has the inherent power to issue a decree of partition or require the sale of jointly owned property.” Id . “The actual physical partition of property is statutorily authorized as the preferred method and is presumed appropriate unless one party demonstrates that physical partition would cause great prejudice to the owners, in which case the property must be sold at public auction.” Snyder Fulton Street, LLC v. Fulton Interest, LLC , 57 A.D.3d 511, 513 (2 nd Dep’t 2008) (citations omitted). The appropriateness of physical partition, as opposed to sale, is a fact question that is determined by analyzing “whether the whole property, taken together, will be greatly injured or diminished in value if separated into parts, in the hands of different persons, according to their several rights or interests in the whole: in other words, whether the aggregate value of the several parts when held by different individuals in severalty would be materially less than the whole value of the property if owned by one person.” Id. (citation, internal quotation marks and ellipses omitted). A party asserting a partition and sale cause of action, “establishe his prima facie entitlement to judgment as a matter of law by demonstrating his ownership and right to possession of the subject property and by showing that a physical partition would lead to great prejudice.”  Goldberger v. Rudnicki , 94 A.D.3d 1048, 1050 (2 nd Dep’t 2012) (citation omitted). “The right to partition is not absolute, however, and while a tenant in common has the right to maintain an action for partition pursuant to RPAPL 901, the remedy is always subject to the equities between the parties.” Id . (citations omitted); see also Tsoukas v. Tsoukas , 107 A.D.3d 879, 880 (2 nd Dep’t 2013). For example, despite the moving party on a summary judgment motion having a name on the deed, and otherwise demonstrating a prima facie case for partition, the opposing party raised triable issues of fact “as to the parties’ respective interests, rights, and shares in the property through her sworn affidavit in which she averred that, inter alia, the defendant did not make any contributions toward the purchase price or maintenance of the property and that the defendant’s name was on the deed as a matter of convenience.” Mi King Chew v. La Chea , 175 A.D.3d 675, 676 (2 nd Dep’t 2019) (citations omitted). On September 25, 2024, the Appellate Division, Second Department, decided 459 Washington Avenue, LLC v. Atkins , a case in which the Court addressed the issue of whether individual members of an LLC can partition real property owned by the LLC in which the individual parties are members. The complaint in 459 Washington alleges that the individual plaintiffs and the defendant “were the sole ‘owners’ of the plaintiff 459 Washington Avenue, LLC (hereinafter the LLC), and that , and the defendant held title to the property as tenants in common, each possessing a one-third undivided interest.” “Irreconcilable acrimony” amongst the parties precipitated the commencement of a partition action. In their motion for summary judgment, the plaintiffs submitted, inter alia , a deed to the subject property by which the property “was conveyed to the LLC, which the plaintiffs contended represented the current ownership of the property.” In response, the defendant argued that “the evidence submitted on the plaintiffs' motion established that the property was owned by the LLC and not by tenants in common or a joint tenancy, and, therefore, partition was not an available remedy.” The defendant appealed from a grant of summary judgment in favor of the plaintiffs. The Second Department reversed and, in so doing stated: The evidence submitted by the plaintiffs on their summary judgment motion established that, contrary to the allegations in the complaint, the property was owned exclusively by the LLC and not by , and the defendant as tenants in common. Essentially, the plaintiffs contended that the three individual parties held equal membership interests in the LLC, which owned the property. "A membership interest in the limited liability company is personal property. A member has no interest in specific property of the limited liability company" ( Limited Liability Company Law § 601 ). Thus, the individual parties hold no ownership interest in the property. Further, even assuming that the plaintiffs had established that the individual parties held equal membership interests in the LLC, there is no allegation or evidence that the LLC has been dissolved or that the LLC's affairs have been properly wound up ( see id . § 703 ). Accordingly, this action, inter alia, for partition and sale of the LLC's property cannot be maintained ( see Daly v Messina , 51 AD3d 856, 857 <2 nd dep’t 2008> nd dep’t 2008>; Greshin v Sloane , 138 AD2d 569, 570 <2 nd dep’t 1988> nd dep’t 1988>; see also Sealy v Clifton , LLC , 68 AD3d 846, 847 <2 nd dep’t 2009> nd dep’t 2009>). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber During the Covid pandemic, conducting discovery, especially the taking of depositions, was challenging. Parties and their counsel had to adapt to the global health crisis. One adaptation was to remotely take depositions. As the courts opened and a new normalcy came into being, many parties and attorneys nevertheless continued to avail themselves of the remote deposition. In the Commercial Division of the Supreme Court of the State of New York, the option to conduct depositions remotely was added to the rules of the court. Others, however, have refused to consent to virtual depositions, demanding that depositions be taken in person. The starting point for the analysis of where a deposition is to be taken can be found in CPLR 3110. Under CPLR 3110(1), “ deposition within the state on notice shall be taken … when the person to be examined is a party or an officer, director, member or employee of a party, within the county in which he resides or has an office for the regular transaction of business in person or where the action is pending .” (Emphasis added.) In other words, the statutory preference for the location of a deposition is, among other places, “where the action is pending.” The foregoing rule applies “to nonresidents as well as to residents of the State.” “ bsent a showing of hardship, the nonresidence of a defendant does not preclude an examination in the county where the action is pending.” Whether the deposition of a non-resident plaintiff should be conducted virtually or in person was before the court in Sumec Textile & Light Indus. Co., Ltd. v. Zee Co. Apparel Corp. , 2024 N.Y. Slip Op. 51306(U) (Sup. Ct., N.Y. County Sept. 19, 2024) ( here ). As discussed below, the motion court held that plaintiff was unable to demonstrate hardship sufficient to have the deposition conducted virtually. Plaintiff argued that good cause existed under Rule 37 of the Rules of the Commercial Division of the Supreme Court to permit its representative to be deposed virtually. Plaintiff argued that its representative resides in China and that the time and expense required for her to travel to New York for a deposition would be unduly burdensome. Plaintiff further argued that plaintiff’s representative is the principal caretaker for a young child and cares for her elderly parents, who all reside in China. Defendant argued that plaintiff advanced nothing more than an argument of “inconvenience”, which is insufficient to demonstrate “good cause for plaintiff to avoid the obligation to produce a witness for deposition in New York.” Defendant also argued that defendant had the right to conduct the deposition in person, which would provide it with an opportunity “to better assess the credibility of the witness and to present the witness with physical evidence relevant to the case, including a coat and hundreds of documents.” In addition, defendant expressed concerns “that a virtual deposition be prone to technical issues in viewing and sharing documents during the questioning of the witness.” The motion court agreed with defendant, holding that plaintiff’s representative had to be deposed in person in New York. The reasons cited by plaintiff are insufficient to overcome the presumption that a party litigating in New York should accept the costs and expenses of choosing to do so. Moreover, as plaintiff has chosen New York as the venue to present its claim, it cannot reasonably argue to be aggrieved by the accompanying obligations. Takeaway “While ‘ he preferred practice, except in cases where hardship is shown to exist, is to proceed with examinations here’, a preferred practice is not the same as an inflexible rule.” Despite the flexibility, the moving party must demonstrate hardship. While one would think that childcare responsibilities and travel across the globe would suffice, as shown in Sumec , more is needed to overcome the statutory requirement that the deposition of a party is to be taken in the forum in which the action is pending. This is especially so when the movant is the plaintiff in the action. ________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See Rule 37 of the Rules of the Commercial Division of the Supreme Court, 22 N.Y.C.R.R. 202.70. Gazerwitz v. Adrian , 28 A.D.2d 556 (2d Dept. 1967). Id. (citations omitted). See also Gryphon Dom. VI, LLC v. APP Intl. Fin. Co., B.V. , 52 A.D.3d 219, 219 (1st Dept. 2008); Swiss Bank Corp. v. Geecee Exportaciones, Ltda. , 260 A.D.2d 254 (1st Dept. 1999); Kahn v. Rodman , 91 A.D.2d 910 (1st Dept. 1983). In determining that good cause exists, the court may consider, among enumerated and other non-enumerated factors, “the distance between the parties and the witness, including time and costs of travel by counsel and litigants and the witness to the proposed location for the deposition,” “ hether the witness is a party to the litigation,” and the “importance or significance of the testimony of the witness to the claims and defenses at issue in the litigation.” See Rule 37(b). Slip Op. at *1. Id. Id. Id. at *2. Gryphon Dom. , 52 A.D.3d at 219 (quoting Kahn , 91 A.D.2d at 911). CPLR 3110(1).

By: Jeffrey M. Haber As a general matter, “ cross trade is a practice where buy and sell orders for the same asset are offset without recording the trade on the exchange.” An adviser that arranges for a security to be purchased from or sold to a client from its own account (which can include an affiliate of the advisor) – as opposed to purchasing or selling the security in the secondary markets – is engaging in a “principal trade.” An “agency cross trade” occurs when an adviser arranges for a trade to be executed between a client and another party, and a “cross trade” occurs when an adviser effects a trade between two or more of its advisory clients’ accounts, but does not charge a fee for effecting the transaction (collectively, “cross trades”). An adviser that enters its clients into these types of transactions implicates a variety of legal obligations under the Investment Advisers Act of 1940 (“Advisers Act”), particularly its fiduciary duty. Cross trades can benefit clients because the practice enables a portfolio manager to move securities among client accounts without having to expose the security to the market thereby saving transaction and market costs that would otherwise be paid to executing broker-dealers. Conversely, cross trades can also pose substantial risks to clients due to the inherent conflict of interest for the adviser, which has a duty of loyalty and duty of care to seek best execution for each client. Cross trading involving mutual funds implicates the Investment Company Act of 1940 (“ICA”). Sections 17(a)(1) and 17(a)(2) of the ICA generally prohibit any affiliated person of a registered investment company (“RIC”) or any affiliated person of the affiliated person, acting as principal, from knowingly selling a security to or purchasing a security from the RIC unless the person first obtains an exemptive order from the Securities Exchange Commission (“Commission” or SEC”) under Section 17(b). Rule 17a-7 promulgated under the ICA exempts from these prohibitions certain cross trades where the affiliation between a RIC and its trading counterparty arises solely because the two have a common investment adviser, or investment advisers that are affiliated persons of each other, common directors, or officers, provided that the cross trades are effected in accordance with Rule 17a-7. Rule 17a-7 requires, among other things, that cross trades be executed at the “independent current market price,” which is defined in relevant part as “the average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry.” If a brokerage commission, fee, or other remuneration is paid in connection with the cross trade, the cross trade is not eligible for an exemption under Rule 17a-7 and is therefore, impermissible. Section 48(a) of the ICA prohibits “any person, directly or indirectly, to cause to be done any act or thing through or by means of any other person which it would be unlawful for such person to do” under the ICA or the rules thereunder. The Commission has stated that interpositioning a dealer in cross trades does not remove the cross trades from the prohibitions of Section 17(a). On July 21, 2021, the Commission’s Division of Examinations issued a Risk Alert on cross trades and principal transactions. Among other things, the SEC Staff opined that with respect to principal trades, to comply with Section 206(3) of the Advisers Act, advisers had to make written disclosures and obtain the consent of the affected client before the transaction was completed. The Staff noted, however, that a more “robust” disclosure regimen, whereby the disclosure includes a description of the nature and significance of the advisers’ conflicts of interest relative to the impacted clients, may be required to comply with Section 206 and Rule 206(3)-2 of the Advisers Act. The Staff also provided certain “observations on ways to improve compliance,” which apply to principal transaction and cross trade situations on a broad scale). The Staff’s suggestions included: Adopt and enforce compliance policies and procedures that: (1) incorporate all applicable legal and regulatory requirements; (2) clearly articulate the activities covered by the advisers’ written compliance policies and procedures; (3) set standards that address the firms’ expectations for each of these activities; (4) include supervisory policies and procedures; and (5) establish controls to determine whether policies and procedures are being properly followed and documented in the required manner. Conduct testing for compliance with policies and procedures. Provide clients with full and fair disclosure of all material facts surrounding principal and cross trades. Provide disclosures to clients regarding principal and cross trading practices in multiple documents. In addition to written disclosures, discuss the rationale for executing principal trades during verbal conversations with clients. Cross trading, among other things, was at issue in a settled enforcement action with Macquarie Investment Management Business Trust (“MIMBT”), in which the SEC charged MIMBT with overvaluing approximately 4,900 largely illiquid collateralized mortgage obligations (“CMO”) held in 20 advisory accounts, including 11 retail mutual funds, and executing hundreds of cross trades between advisory clients that favored certain clients over others to minimize losses to those clients. According to the SEC’s order (here), from January 2017 through April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, a fixed-income investment strategy primarily invested in mortgage-backed securities, CMOs, and treasury futures. Strategy investments included thousands of smaller-sized, “odd lot” CMO positions that traded at a discount to institutional, larger-sized positions. MIMBT valued the odd lot CMOs using prices obtained from a third-party pricing service that were intended for institutional lots only. The pricing service did not provide separate valuations for odd lots. The SEC found that MIMBT had no reasonable basis to believe it could sell the odd lot CMOs at the pricing vendor’s valuations, and thousands of odd lot CMO positions were marked at inflated prices. This resulted, said the SEC, in MIMBT overstating the performance of client accounts holding the overvalued CMOs. The SEC further found that MIMBT attempted to minimize losses to redeeming investors by arranging cross trades with affiliated accounts, rather than selling the overvalued CMOs into the market. In one instance, said the SEC, MIMBT executed 465 internal cross trades between a selling account and 11 retail mutual funds above independent current market prices. The SEC noted that these trades resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account in a market sale. The SEC also found that MIMBT arranged for approximately 175 dealer-interposed cross trades in which MIMBT temporarily sold odd lot CMO positions to third-party broker-dealers and then repurchased those same positions for allocation to one or more affiliated client accounts, providing liquidity to redeeming investors in an otherwise illiquid market, often at above-market prices. “It is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades to mitigate its overvaluation of fund assets,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.” The SEC found that MIMBT violated the antifraud and compliance provisions of the Advisers Act, and certain provisions of the ICA. Without admitting or denying the SEC’s findings, MIMBT agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $70 million penalty and disgorgement and prejudgment interest, totaling an additional $9.8 million. MIMBT also agreed to comply with certain undertakings, including retaining a compliance consultant to conduct a comprehensive review of its policies and procedures relating to, among other things, valuation of CMOs and associated liquidity risks, and cross trading. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Chen, James, “Cross Trade”, Investopedia (Updated August 6, 2024) (here). See, e.g., Advisers Act Sections 206(1), (2), and (3) and Rules 206(3)-2 and 206(4)-7. An adviser’s obligation as a fiduciary is enforceable through Section 206 of the Advisers Act. SeeExemption of Certain Purchase or Sale Transactions Between a Registered Investment Company and Certain Affiliated Persons Thereof, Investment Company Act Release No. 11136, 1980 WL 29973, at *2 n.10 (Apr. 21, 1980). SeeRisk Alert: Observations Regarding Fixed Income Principal and Cross Trades by Investment Advisers from An Examination Initiative (July 21, 2021) (here). The Risk Alert was issued as a follow up to a 2019 alert, which focused on common cross trade and principal transaction deficiencies observed in examinations conducted over a three-year period. See Risk Alert: Investment Adviser Principal and Agency Cross Trading Compliance Issues (Sept. 4, 2019) (here). Id.